US to allow condensate exports after light refining

The US widened its definition of what’s traditionally been considered a refined product eligible for shipping abroad. That means more of oil pumped from US shale may be eligible for export.

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By ZAIN SHAUK, DAN MURTAUGH and RAKTEEM KATAKEY

Bloomberg

The US Commerce Department opened the door to more US oil
exports as long as the crude is lightly processed, tempering
the impact of a law thats banned most overseas
petroleum shipments for the past four decades.

The department widened its definition of whats
traditionally been considered a refined product eligible for
shipping to customers abroad. That means more of the oil
being pumped from US shale formations may be eligible for
export after being run through small-scale processing units.

The Commerce Department issued its ruling after Pioneer
Natural Resources Co. petitioned for approval to export a
type of ultra-light oil that had been stripped of lighter
gases to make it less volatile for transport -- a minimal
level of processing known as stabilization.

The ultra-light oil, known as condensate, has been abundant
in shale formations during the drilling boom, leading to
oversupplies on the Gulf Coast.

Its a crack in the door which has otherwise been
shut for 40 years, Harry Tchilinguirian, head of
commodity markets strategy at BNP Paribas in London, said by
phone. If approvals for condensate exports are extended
to more companies, itll benefit US producers and
processors in Asia, particularly in Singapore and South
Korea.

Any oil that has been processed through a distillation tower
-- a preliminary form of refining -- is no longer defined
as crude oil, and therefore is eligible for export, said Jim
Hock, a department spokesman.

Pioneer uses a distillation unit to stabilize oil it produces
in the Eagle Ford Shale of South Texas, most of which is
condensate.

The Commerce Department recently confirmed our
interpretation that the distillation process by which our
Eagle Ford Shale condensate is stabilized is sufficient to
qualify the resulting hydrocarbon stream as a processed
petroleum product eligible for export without a
license, Pioneer said.

Its not exactly going to be a game changer but
its certainly the next step in providing the market
with some relief, said Robert Campbell, head of oil
products research at Energy Aspects, a London-based research
firm.

West Texas Intermediate crude for August delivery climbed as
much as $1.47, or 1.4%, to $107.50/bbl in electronic trading
on the New York Mercantile Exchange, before trimming gains to
trade 0.4% higher at $106.43/bbl at 12:26 p.m. in London.
Brent oil futures slid 0.7% to $113.66.

Economic Forces

There are certainly a lot of inexorable economic forces
that suggest the US is going to relax the export ban in the
long term, said Ric Spooner, a chief strategist at CMC
Markets in Sydney.

Further applications for exports from the US may follow this
approval, Morgan Stanley analysts led by Adam Longson wrote
in a report. If more overseas sales are allowed, US
condensate could find its way to Asia, from which companies
can produce naphtha used in the petrochemical industry, BNPs
Tchilinguirian said.

A lot of condensate splitting capacity is in Asia and
more will be added this year, he said. Some of
the Asian processors would have been wondering where the
condensate is going to come from.

Restricted Exports

The US has restricted most crude exports since 1975, in
response to the Arab oil embargo. Shipments to Canada are an
exception, and those averaged 246,000 bpd in March, the
highest level since April 1999.

It is certainly the first step towards the lifting of
the ban on US crude exports and will be welcomed by the oil
world, Ehsan Ul-Haq, senior market consultant at KBC
Energy Economics in Walton-on-Thames, England, said by phone.
It comes at a time when geopolitical skirmishes have
added more than $10 a barrel of risk premium to oil
prices.

US oil producers such as Continental Resources and
ConocoPhillips have been clamoring for an end to the
restrictions as shale production has brought a surge in North
American petroleum supplies. US crude production has jumped
45% since the start of 2012, driven by horizontal drilling
and hydraulic fracturing in places including North Dakota and
Texas.

Supplies on the Gulf Coast rose to more than 215 million bbl
in May, the highest level on record since 1990, according to
Energy Information Administration data. Much of that supply
has been in the form of lighter crude, and arrived after Gulf
Coast refiners made expensive upgrades to their plants to
process heavier crudes from places such as Canada and Mexico.

First Step

The Commerce Departments willingness to qualify more
lightly processed crude for overseas shipments should lead to
even wider approval of crude exports, said Senator Lisa
Murkowski, Republican of Alaska. The decision is a
reasonable first step that reflects the new reality of our
energy landscape, she said.

It could also make plans for more complex processing plants,
known as splitters, less economic. Several companies are
building and planning condensate splitters that are designed
to process lighter crudes from shale formations into products
like naphtha, kerosene and gasoil, which are eligible for
export.

The plants, built for one-tenth the cost of a complex,
full-scale refinery, were also aimed at using
minimum processing to qualify oil as a refined product for
export.

The first of the units, a 50,000-bpd processing plant built
by Kinder Morgan Energy Partners for use by BP, is scheduled
to come online in November. BP has signed a 10-year contract
to use the facility, which will be expanded to 100,000 bpd in
2015. Several additional plants have been proposed by other
pipeline or trading companies, and refiners including Valero
Energy and Phillips 66 said they plan to add similar oil
processing equipment.

Refined Product

The distillation towers that the
Commerce Department says are needed to process oil into an
export-eligible refined product arent defined by size,
said Andy Lipow, president of Lipow Oil Associates, a
consulting firm in Houston. The towers could include
equipment such as stabilizers that are used in oil fields to
separate the lightest gases such as propane and butane from
some condensate to prepare it for shipping, he said.

An eventual removal of the export ban would promote US oil
production, said Zak Cikanek, a spokesman for the oil
industry trade group American Petroleum Institute, which said
it hasnt yet reviewed the Commerce Department ruling.

Allowing the export of processed condensate would be a
very small step toward a much more important goal, which is
free trade, Cikanek said.

Largest Refiner

While Phillips 66, the largest US refiner by market value,
has been supportive of lifting the crude export ban, refiners
will probably reap lower profits if they are forced to pay
higher prices to compete with international buyers for US
crude.

We dont think the current system needs to be
changed, said Bill Day, a spokesman for Valero Energy.
The United States is still importing quite a bit of
crude oil to satisfy our needs.

Net US crude imports were 7.16 million bpd as of June 13,
down 24% over the last five years, according to data from the
EIA.

The decision to allow a wider category of lightly processed
oil provides a stronger base to argue for broader approval of
crude exports, said Lipow, the Houston oil consultant.

Theres cracks in the crude oil export dam,
he said.

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